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Fintech Sandbox: Facilitating Innovation in NBFCs

Fintech Sandbox: Facilitating Innovation in NBFCs

Banking Law | NBFC | Non Banking Finance | Finance Banking | Finance Banking Laws | Banking Governance | 


Non-banking financial companies (NBFCs) are an important segment of the Indian financial system, providing credit and other services to the underserved and unbanked segments of the population. However, NBFCs face several challenges such as regulatory compliance, operational efficiency, customer acquisition, risk management, and innovation. To overcome these challenges, NBFCs need to leverage the power of emerging technologies and collaborate with fintech companies that offer innovative solutions and platforms.

One of the ways to foster such collaboration and innovation is through a fintech sandbox, which is a controlled environment where fintech companies can test their products and services with real customers and data, under the supervision and guidance of regulators and industry experts. A fintech sandbox can provide several benefits for NBFCs, such as:

1.     Access to new and alternative data sources, such as social media, e-commerce, mobile, and biometric data, that can help NBFCs improve their credit scoring models, customer segmentation, and underwriting processes.

2.     Access to new and advanced technologies, such as artificial intelligence, machine learning, big data analytics, blockchain, cloud computing, and robotic process automation, that can help NBFCs enhance their operational efficiency, fraud detection, cyber security, and regulatory compliance.

3.     Access to new and diverse customer segments, such as millennials, gig workers, small and medium enterprises, and rural customers, that can help NBFCs expand their market reach, offer personalized products and services, and increase customer loyalty and retention.

4.     Access to new and innovative business models, such as peer-to-peer lending, robo-advisory, digital payments, and insurance, that can help NBFCs diversify their revenue streams, reduce their cost of funds, and increase their profitability and competitiveness.

Examples of Fintech Sandbox Initiatives

Several countries and jurisdictions have launched or announced fintech sandbox initiatives, such as the UK, Singapore, Hong Kong, Australia, Malaysia, Thailand, Bahrain, Abu Dhabi, and Dubai. Some of the examples of fintech sandbox initiatives that are relevant for NBFCs are:

1.     The Reserve Bank of India (RBI) has launched a regulatory sandbox for fintech companies in August 2019, with the theme of ‘Retail Payments’.[1] The sandbox allows fintech companies to test their products and services for a period of six months, with a maximum extension of another six months. The sandbox covers areas such as mobile payments, digital KYC, QR code-based payments, offline payment solutions, and blockchain-based payments. The RBI has also announced the second cohort of the sandbox, with the theme of ‘Cross Border Payments’, in November 2020.

2.     The Monetary Authority of Singapore (MAS) has launched a [fintech sandbox] in June 2016, which allows fintech companies to test their products and services for a period of up to 18 months, with a possible extension of another 12 months. The sandbox covers areas such as lending, insurance, wealth management, payments, and digital banking. The MAS has also launched a [fintech sandbox express] in August 2019, which allows fintech companies to test their products and services for a period of up to nine months, without the need for prior approval from the MAS. The sandbox express covers areas such as insurance broking, remittance, and digital advisory services.

3.     The Financial Conduct Authority (FCA) of the UK has launched a [fintech sandbox] in May 2016, which allows fintech companies to test their products and services for a period of up to six months, with a possible extension of another six months. The sandbox covers areas such as lending, insurance, wealth management, payments, and digital banking. The FCA has also launched a [global financial innovation network] in January 2019, which is a network of regulators and organizations that aims to facilitate cross-border testing of fintech products and services and share best practices and experiences.

Challenges Of Fintech Sandbox:

1.     Legal uncertainty: The sandbox may create ambiguity or inconsistency in the interpretation and application of existing laws and regulations, or create loopholes or gaps that could be exploited by unscrupulous actors.

2.     Implementation costs: The sandbox may require significant financial and human resources from both the regulators and the participants, which could divert resources from other priorities or create operational inefficiencies.

3.     Consumer protection: The sandbox may expose consumers to potential risks or harms, such as data breaches, fraud, loss of funds, or unfair practices, especially if the participants are not subject to adequate safeguards or oversight.

4.     Market distortion: The sandbox may create an uneven playing field or unfair advantage for the participants, who may enjoy regulatory waivers or exemptions, lower compliance costs, or preferential access to data or customers, compared to other market players

Best Practices and Recommendations for Implementing a Fintech Sandbox:

1.     Define clear objectives and scope: The sandbox should have a clear purpose and scope, aligned with the regulator’s mandate and the market’s needs. The sandbox should also specify the types of products, services, or business models that are eligible for testing, and the expected outcomes and benefits for the participants and the consumers.[2]

2.     Set transparent and consistent eligibility criteria: The sandbox should have objective and consistent criteria for selecting the participants, based on factors such as the innovativeness, readiness, and scalability of the proposed solution, the potential risks and benefits for the consumers and the financial system, and the fit and properness of the applicant.[3]

3.     Determine appropriate duration and extension: The sandbox should have a predefined duration for the testing period, which should be sufficient for the participants to collect and analyse the data and results, and for the regulator to monitor and evaluate the performance and impact of the solution. The sandbox should also have a clear exit strategy and criteria for granting or denying an extension of the testing period, if needed.[4]

4.     Establish reporting and evaluation requirements: The sandbox should have regular and timely reporting and feedback mechanisms, both for the participants and the regulator, to track the progress and performance of the testing, identify and mitigate any issues or risks, and assess the outcomes and learnings of the testing. The sandbox should also have clear evaluation metrics and indicators, such as customer satisfaction, market penetration, cost reduction, risk reduction, or regulatory compliance.[5]

5.     Provide appropriate regulatory support and guidance: The sandbox should provide adequate regulatory support and guidance to the participants, such as granting regulatory waivers or exemptions, providing dedicated contact points or mentors, facilitating cross-border collaboration or coordination, or offering technical assistance or advice. The sandbox should also ensure that the participants comply with the relevant laws and regulations, and protect the interests and rights of the consumers.[6]


A fintech sandbox can be a powerful tool for facilitating innovation and collaboration in the NBFC sector, by providing a safe and conducive environment for testing and experimenting with new technologies, products, and services. A fintech sandbox can also help NBFCs address their pain points, such as regulatory compliance, operational efficiency, customer acquisition, risk management, and innovation. By partnering with fintech companies and regulators, NBFCs can leverage the fintech sandbox to enhance their value proposition, customer experience, and competitive edge.

[1] RBI, FinTech: The Force of Creative Disruption, (2020),

[2]Baker McKenzie, A Guide to Regulatory Fintech Sandboxes Internationally, (last visited Jul 15, 2020).

[3] Id.

[4] Id.

[5] Id.

[6] Id.

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